BLOOMINGTON, Ind. -- When it comes to buying brands, it turns out investors have preferences. Investors reward companies acquiring stand-alone brands, rather than entire firms, particularly when a buyer has strong marketing capabilities.

Similarly, selling a brand that a company cannot do a great job of marketing or that is unrelated to its core business can boost the seller's share price. Most important, transferring a brand from a firm with weaker marketing capabilities to one with stronger marketing capabilities creates net shareholder worth for both companies.

These top-line findings from the Indiana University Kelley School of Business indicate that investors have a deeper understanding of marketing's impact and financial value than previously believed. They also set a road map for how companies can strategically select brand assets to acquire or sell and hint at a new business model designed to "incubate" brands specifically for future sale.

Despite active markets for brand assets, little is known about financial benefits from such transactions though historically, buying entire companies for brand assets tended to harm the shareholder -- known in the M&A world as the "winner's curse."

"Determining a clear link between marketing investments and share performance has been like chasing the Holy Grail, especially related to brand acquisition, which is among any company's biggest marketing investments," said Neil A. Morgan, the PetSmart, Inc. Distinguished Chair in Marketing at the Kelley School. "For the first time we have empirical data showing that marketing capabilities are key to turning a brand investment, which had previously been a leap of faith, into a strategic and profitable move for buyer, seller and shareholder."

Managers, look before you leap

To understand how a company could yield returns from purchasing a brand, the authors examined the market response to brand announcements made by 322 companies across 31 consumer industries. The results indicated that:

Companies with strong marketing capabilities -- such as pricing, communications, relationships with sales channels -- and complementary brand assets should seek individual brands with a high quality/price positioning owned by firms with relatively weaker marketing capabilities.

Companies looking to divest assets should look in their portfolios for brands with a lower quality/price positioning that are furthest removed from the firm's core business and for which it can provide relatively weak marketing support.

Managers should not be concerned that investors view selling brand assets as a sign of weakness or failure, particularly if analysts perceive that the company has achieved a good price. Thus, they are able to rebalance or refocus a brand portfolio without fearing that such sales will, in and of themselves, destroy shareholder value.

Surprisingly, language used in announcing a brand transaction affects investor reaction and thus, share price. Shareholders react well to discussion of how a company's marketing capabilities would add value to a brand, including achieving "cost synergies," because companies often share specific tactics.

"But the markets will ding a company that extols 'revenue synergies' that will result from integrating brands. It is a vague term, and investors see it as code that a company isn't certain what to do with the brand," Morgan said.

The brand nursery

The authors noted that their results suggest the intriguing possibility of a "brand nursery" business model in which companies could create and nurture brands and then sell them to firms with superior marketing capabilities for whom they would have more value.

"We're not aware of firms that have adopted such a model explicitly and we're excited about its promise," Morgan said.

Further, the authors believe that growing interest in linking marketing investments to shareholder wealth call for research into potential markets for other types of marketing-related assets.

The paper, "The Effect of Brand Acquisition and Disposal on Stock Returns," was written with Michael A. Wiles of the W.P. Carey School of Business at Arizona State University and Lopo L. Rego of the Kelley School. It appears in the January issue of the Journal of Marketing.